ESG compliance: Questions you need to answer for investors

ESG compliance

Over the last number of years, there has been a surge in ESG investments as businesses work to achieve ESG compliance and business sustainability. It’s no surprise when you consider that sustainable companies have proven to be good investments as they are regarded as more forward-thinking and well-prepared for future challenges. 

An overarching theme emerging is a transition from pure profit-oriented businesses that only focus on shareholder value to businesses that consider stakeholder value in the context of the overall impact a business has on the world. Studies consistently illustrate that businesses focused on ESG factors typically have better financial performance and risk management. With investors warming towards companies prioritising ESG, there are several questions you can expect to be asked about your company and its commitment to achieving ESG compliance.

What is ESG compliance? 

Environmental, social, and governance (ESG) compliance refers to a set of standards and guidelines a company integrates into internal policies that are mandated by regulatory bodies. For companies to achieve ESG compliance, they must follow the ESG principles and take action.

What is an ESG investment? 

When an investor chooses an ESG investment, they effectively invest money to work in companies that aim to improve the world. This kind of investment typically aligns with their personal values.

Why do investors care about ESG and ESG compliance? 

In the current climate, environmental, social and governance (ESG) factors are increasingly driving investment strategies. What’s more, new research from PwC has found that ESG is becoming a make-or-break consideration for leading investors worldwide. 

Nearly half of the investors surveyed (49 percent) expressed a willingness to divest from businesses not taking sufficient action on ESG-related issues. Over half (59 percent) have said they would vote against an executive pay agreement if there was a lack of action on ESG issues. 

A third of the respondents said they had already taken this action. The way a company manages ESG opportunities and risks is also considered to be an important factor in investment decision-making for a large majority of the respondents (79 percent).

Investors are leaning more towards investing in businesses that prioritise ESG practices. Therefore, businesses that incorporate ESG factors into investment attraction and economic development plans can increase their chances of not only attracting ESG investment but also fuelling sustainable growth. 

The bottom line is that ESG considerations help investors in many ways. They help investors identify potential risks not captured by traditional financial analysis. Additionally, organisations that implement ESG factors are generally viewed as more sustainable and positioned for long-term success, making them better investments. 

Through investing in businesses that incorporate ESG factors, investors can also align their values with their investment decisions and boost their reputation as responsible investors. Another area where the integration of ESG considerations can assist investors is in the area of compliance and regulatory requirements. 

Questions you should know the answers to 

Depending on the size of your company, the sophistication and level of conversations will differ. However, irrespective of size, you can still expect the following questions when investors are assessing whether your company is a worthwhile ESG investment that aligns with their values.

What are the values you espouse when pursuing your commercial goals?

Understanding the company values is key for ESG investors. Does your business have a clear statement of values or principles, and do those values complement your business plan? For example, can you articulate that you want to be the best clothing brand but will not use child and forced labour and instead respect employees and do the utmost to protect the environment? 

If a business has shared its values and standards of responsible behaviour concerning its stakeholders and the wider society, investors can hold them accountable. An immediate red flag for investors is a business not having a clear values statement. Ultimately, investors will want to comprehend a company’s values to determine their sustainability and social responsibility goals and their governance procedures.

What ESG reporting framework are you using and why?

ESG reporting enhances investor confidence because it provides transparency into risks and opportunities. With this in mind, a key question for ESG investors when considering your business will surround which ESG reporting framework you are using and why. 

While there is still no universal framework, they will want to know you are using an established framework, as this illustrates your dedication to avoiding greenwashing in your reporting. Some examples of ESG reporting frameworks include the Global Reporting Initiative (GRI), the Task Force on Climate-related Disclosures (TFCD), and the Sustainability Accounting Standards Board (SASB) standards

What accountabilities and targets have you set for ESG-related performance?

Investors will want to know how a company ensures it remains accountable to ESG. In this context, businesses integrating ESG factors have a responsibility to transparently report on their performance and be held accountable for their actions. 

This accountability is crucial as it ensures organisations are taking their ESG commitments seriously. Investors are invested in the success of your business, so they will also want to know about the various targets you have set for ESG-related performance and how you measure success. 

What are your ESG risks, and how well are you managing them?

ESG activities and goals present new and unique opportunities and risks. These should be considered through the organisation’s risk management lens. Investors will want to know you can not only identify the risks and opportunities but that you can also manage them. 

Is your business well-educated on ESG and sustainability-related issues?

Sustainability can be a challenging concept for businesses. Moreover, for corporate sustainability to be successfully embedded in a business, it must become integrated. This means ensuring not only that leaders are well educated on ESG and sustainability but also team members. 

Investors are becoming more sophisticated and familiar with sustainability, which means they can easily spot the companies that are not truly working at implementing sustainability. To truly embed sustainability and ESG in a company requires education, and ESG investors know this. 

Therefore, you can expect them to ask about your organisation’s ESG literacy and education level. This is where referencing some courses and training you have completed can help you stand out amongst the crowd and position your company as a good investment opportunity. 

At the Institute of Sustainability Studies, we offer comprehensive and practical corporate sustainability team training. The course enables teams to elevate their sustainability literacy and showcases your company’s dedication to improving environmental and social performance. 

Final thoughts

Where ESG and sustainability were relatively nascent parts of corporate culture five years ago, they are now increasingly important for attracting ESG investments. Climate change and other ESG issues are now considered to be key determinants of an organisation’s future value creation. 

In light of this, ESG investors are putting pressure on companies to demonstrate their beneficial environmental impact in addition to their financial performance. Not knowing the answers to the above questions could risk you losing out on investment opportunities as you fail to showcase how you are future-proofing your company. 

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